Customer concentration
How much of a business's revenue comes from its largest customers. High concentration lowers value because it concentrates risk.
In more detail
If one customer is 40% of revenue, a buyer is not purchasing a diversified business, they are purchasing a relationship. Concentration is normally measured as the share held by the largest customer and by the top five, tracked over several years. Long tenure and contracts soften it. A concentrated customer who is also on a handshake and personally close to the departing owner is the hardest version of this problem.
For example
A business with $5M of revenue where the largest customer is $2M is 40% concentrated. Most buyers will discount for that, and some will not proceed.
If you are selling
It is one of the biggest levers on your multiple, and one of the slowest to fix. If you are years from selling, start diversifying now.
If you are buying
Look past the percentage to tenure, contract terms and who owns the relationship. A 30% customer on a five-year contract is not a 30% customer on a handshake.
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